🚘 Tesla: AI & Robotics
And why Elon Musk wants 25% voting control
Greetings from San Francisco! 👋
A warm welcome to the recent additions to our community!
Over 79,000 How They Make Money subscribers turn to us weekly for business and investment insights. Glad you're here.
📉 Tesla shares fell more than 10% on Thursday after reporting earnings.
Getting déjà vu? The story was the same in the previous three quarters.
So what happened? In short:
Tesla missed expectations in Q4 FY23.
A slowdown in vehicle sales growth is expected in FY24.
As always, the quarter had a lot to unpack, and we're here to walk you through it with visuals and data-driven insights.
🌎 The most valuable company in the world?
Elon Musk delivered once again quotable quotes:
“I do see a path where Tesla could one day be the most valuable company in the world. I do emphasize that is not an easy path and a very difficult one, but it is now in the set of possible outcomes and previously I would not have thought it is in the set of possible outcomes.”
This is a recurring soundbite in Tesla’s earnings calls. Musk said previously he thought Tesla had the potential to be bigger than Apple and Saudi Aramco combined in the next five years. The caveat? Execution must be flawless.
🤖 But first, Musk wants 25% voting control at Tesla
“People think of Tesla as a car company when they should be thinking of Tesla as an AI robotics company.”
However, Musk is uncomfortable expanding Tesla’s AI and robotics initiatives without more control. He candidly explained:
“I see a path to creating an artificial intelligence and robotics juggernaut of truly immense capability and power. […] If we could do a dual-class stock, that would be ideal. I'm not looking for additional economics. I just want to be an effective steward of very powerful technology. And the reason I just sort of roughly picked approximately 25% was that's not so much that I can control the company, even if I go bonkers and if I'm, like, mad, they can throw me out. But it's enough that I have a strong influence. That's what I'm aiming for, is a strong influence, but not control. If there's some way to achieve that that would be great.”
Musk currently owns roughly 13% of Tesla. It’s unclear whether there is a path for him to gain 25% voting control of the company — or if shareholders should be worried about the future of AI and robotics at Tesla.
Today at a glance:
Tesla Q4 FY23.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
1. Tesla Q4 FY23
Tesla's revenue comes from three primary sources:
🚗 Automotive: Revenue from selling electric vehicles, including models S, 3, X, and Y (86% of revenue).
🔌 Services and Other: Revenue from vehicle service, Supercharger network, and sales of automotive parts and accessories (9% of revenue).
🌞 Energy Generation and Storage: Revenue from solar products and energy storage solutions, like Solar Roof and Powerwall (6% of revenue).
The number of deliveries and the average price per vehicle impact automotive revenue. While Tesla achieved its forecasted deliveries for FY23, it did so at a much lower average selling price.
FY23 production: 1.84 million vehicles (+35% Y/Y).
FY23 deliveries: 1.81 million vehicles (+38% Y/Y).
Based on the confusion in my social media feed, let's break down two key financial terms from the income statement:
Regulatory credit: Tesla earns these credits for producing electric vehicles. They then sell these credits to other car manufacturers who need them to meet emission standards. Think of it as Tesla being rewarded for being green and helping others comply with environmental regulations. These credits form about 2% of Tesla’s automotive revenue. As the auto industry gradually shifts towards electric vehicles, we can expect the demand and revenue from these credits to decrease.
Tax benefit: In Q4, Tesla made a strategic financial adjustment. They released roughly $6 billion previously set aside for taxes, which gave their net income a significant one-time boost. It's important to note that this is not regular income from selling cars or services. It's like finding extra money in your budget you had put aside for expenses that are no longer necessary. While this positively impacts the bottom line, it's a one-off event and not recurring. So, focusing on Tesla's core business profitability is more insightful, which we can gauge better through their operating margin.
Here is a bird’s-eye view of the income statement
Revenue grew +3% Y/Y to $25.2 billion ($0.6 billion miss).
Gross margin was 18% (flat Q/Q, -6pp Y/Y).
Operating margin was 8% (+1pp Q/Q, -8pp Y/Y).
EPS (non-GAAP) was $0.71 ($0.03 miss).
Gross margin trends:
Auto had a 17% gross margin, excluding regulatory credits. It was 16% in Q3, and 24% a year ago. It was the first rebound after a decline for four consecutive quarters.
Services and Others had a 3% gross margin, positive for the 7th consecutive quarter.
Energy generation and storage remained the highest gross margin segment at 22% (a slight decline from Q3, but up 10pp Y/Y).
Tesla’s operating expenses were $2.4 billion or 9% of its total revenue (compared to 10% in Q3 and 8% a year ago). This includes $1.1 billion in research & development and the rest toward selling, general & administrative expenses.
Tesla’s margins have historically been ahead of other car manufacturers thanks to three critical leverages:
🏭 Economies of scale (though gigafactories).
🚗 Direct-to-consumer (online and via its showrooms).
💰 Low marketing costs (Tesla barely spends on advertising).
However, auto margins have been squeezed recently due to price cuts.
While margins are expected to expand over time through non-auto segments and software solutions/upsell, FY23 was a low point. In the past 12 months, the operating margin was 9%, a sharp decline from 17% in FY22 and 12% in FY21.
Operating cash flow was $4.4 billion (17% margin, +4pp Y/Y).
Free cash flow was $2.1 billion (8% margin, +2pp Y/Y).
Global vehicle inventory (days of supply) was 15 (vs. 13 in Q4 2022).
Cash, cash equivalent, and marketable securities: $29.1 billion.
Long-term debt: $2.9 billion.
Tesla's delivery growth has slowed: It was only 20% Y/Y in Q4. This trend is expected to continue into FY24.
Getting worse before it gets better: The company predicts a dip in vehicle volume growth as the Model 3/Y platform moderates and the focus shifts towards launching its next-generation vehicle in FY25 (more on this in a second). At the same time, Tesla's Energy Storage segment is expected to outpace Automotive.
As explained by CFO Vaibhav Taneja:
“We are between two major growth waves. The first one began with the global expansion of Model 3 and Y, and we believe the next one will be initiated with the next generation platform.”
So what to make of all this?
Price cuts were required to keep production in line with demand, leading to a steep slowdown in revenue growth and margin compression for the auto segment.
The company is prioritizing volume and fleet growth. This strategy hurts margins in the short term, but management expects it to generate significant profit over time through autonomy (full self-driving monetization).
The main factor in the auto gross margin stabilization was a continued improvement in the cost of goods sold per vehicle, dropping below $37,000 for the first time. These efficiencies should lead to margin expansion in a more favorable macro environment.
Operating margin improved slightly sequentially but was still down significantly compared to Q4 2022:
🔻 Negative impact: Price cuts, Cybertruck production ramp, AI, and other significant project expenses.
🔺 Positive impact: Lower cost per vehicle, delivery growth, gross margin improvement for the non-auto segments.
Free cash flow was a bright spot, growing 45% Y/Y to $2.1 billion. Capital expenditures were down sequentially, illustrating that Tesla remains a tight ship.
The balance sheet remains stellar. Management believes the company has ample liquidity to finance its product roadmap while maintaining positive cash flow margins.
2. Recent business highlights
🚗 Model Y Triumph: Preliminary data from JATO Dynamics suggests the Model Y is the best-selling car globally in 2023, with 1.23 million units sold. Its success is primarily attributed to strong demand in Europe and China, two of the largest EV markets.
🔌 Supercharging the EV market: Tesla's North American Charging Standard (NACS) is increasingly being adopted by major automakers, including Volkswagen, Porsche, and Audi recently. Stellantis is the only EV maker still holding out. This widespread acceptance could boost Tesla's Services segment and increase margin.
🌍 Market share insights: Tesla's market share in North America has hit 4%, indicating continued growth. However, the rate of share gain shows signs of a slowdown, especially in Europe.
🤖 Autopilot and Full Self-Driving (FSD): Tesla reached nearly 800 million miles driven by FSD beta. The latest FSD Beta software (V12), trialed by selected Tesla employees, utilizes end-to-end training for enhanced performance.
🔋 Energy storage deployments: Tesla's energy storage deployments reached a new high in 2023, with nearly 15 gigawatt hours of batteries delivered, more than doubling the 6.5 gigawatt-hours in 2022.
3. Key quotes from the earnings call
Elon Musk on the outlook:
“Tesla is currently between two major growth waves. We're focused on making sure that our next growth wave, driven by next-gen vehicle, energy storage, full self-driving, other projects, is executed as well as possible.”
On FSD V12:
“This is currently just with employees and a few customers, but we will be rolling out to all customers in the U.S. who request full self-driving in the weeks to come. That's over 400,000 vehicles in North America.
This is the first-time AI is being used, not just for object perception, but for path planning and vehicle controls. We replaced 330,000 lines of C++ code with neural nets. It's really quite remarkable.”
On the potential to license FSD:
“We've had some tentative conversations, but I think they don't believe it's real quite yet. I think that will become obvious probably this year.”
On the next-generation platform:
“We're very excited about this, and this is really going to be profound, not just in its design of the vehicle itself, but in the design of the manufacturing system. This is a revolutionary manufacturing system far more advanced than any other automotive manufacturing system in the world by a significant margin.
The product has yet to be announced at a later date.
“Our current schedule shows that we will start production towards the end of 2025.”
Musk admitted he’s often optimistic regarding Tesla’s product timeline.
On Tesla’s differentiation:
“Perhaps the most important competitive characteristic of Tesla in the future will be manufacturing technology.”
“Optimus, obviously, is a very new product, an extremely revolutionary product, and something that I think has the potential to far exceed the value of everything else that Tesla combined. When you think of an economy, economy is productivity per capita times capita. But what if there's no limit to capita? There's no limit to the economy.”
“I see us ultimately delivering on the order of 0.25 million, something like 0.25 million Cybertrucks a year in North America, maybe more.”
VP of Supply Chain Karn Budhiraj said Tesla will soon have sold out all the builds in 2024. So demand is not a problem, and it’s product-constrained.
“ It's a high-risk, high-payoff program. Dojo is working, and it is doing training jobs, and we are scaling it up, and we have plans for Dojo 1.5, Dojo 2, Dojo 3, and whatnot. […] There's a potentially interesting play where when cars are not in use in the future that the in-car computer can do generalized AI tasks, can run a sort of GPT-4 or GPT-3 or something like that.”
If Tesla ends up with tens of millions of cars, Musk asserts that the company may have more compute power than everyone else combined. That’s a bold statement, but there is no doubt that Dojo gives Tesla optionality.
CFO Vaibhav Taneja on Auto margins and cost reductions:
“Predicting auto gross margins is extremely challenging since there are many moving parts to this equation, some of which are out of our control like the change in tariffs or local incentives to name a few. While the teams are focused on cost reductions, we are approaching the limits within our current platforms.”
4. What to watch looking forward
Tesla's Optimus humanoid robot was recently filmed folding a t-shirt. But don't get too excited just yet. The performance was slow, and the task was pre-scripted, not autonomous.
🎭 Current stage: Optimus' performance, while impressive, is more akin to a sophisticated puppet than an AI entity, executing pre-scripted actions rather than showing autonomous decision-making.
🕰️ Long-term vision: Elon Musk envisions fully autonomous functionality in the future, though achieving this remains a significant challenge. Musk's ambitious 3-5-year timeline for a fully functional Optimus seems overly optimistic, given the current state of robotics.
👚 Keep folding your laundry: For now, Optimus is more of a tech showcase than a practical household helper, so don't plan on handing over your laundry just yet. But keep your eyes peeled for future announcements on the latest chores handled by Optimus.
🇨🇳 BYD is coming
BYD, the Chinese automaker, is rapidly gaining momentum and presents a growing challenge to Tesla.
📊 Market Performance: In 2023, BYD sold 1.6 million Battery EVs, just behind Tesla's 1.8 million, but led in Q4 sales.
🌍 Global Ambitions: With plans to double European dealerships and a target of 250,000 overseas sales in 2023, BYD is aggressively expanding globally.
🏆 Competition heating up: Tesla's recent price cuts in China have sparked a competitive price war, highlighting the increasing pressure from Chinese car makers in domestic and international markets.
Watch out for BYD’s international expansion and market share gains.
🚖 Next-generation platform “Redwood”
Here’s what we know about Tesla’s next-generation vehicle, “Redwood.”
🗓️ Production Start: Set for late 2025, with potential delays to 2026.
🚀 Ambitious Plans: Aiming for 10,000 vehicles weekly.
💡 Model: Described as a compact crossover.
A game changer:
📈 Growth Potential: Some analysts believe a $25,000 car could "double Tesla's business," though it’s too early to talk about pricing.
🛠️ Next-Gen Manufacturing: The vehicle is expected to be a game-changer not just for the design of the car itself but the design of the manufacturing system.
🇺🇸 First Line: Gigafactory in Texas.
🇲🇽 Second Line: Gigafactory in Mexico.
What to watch:
⌛ Timeline concerns: Musk's track record suggests possible delays.
📉 Model 3 cannibalization: A new model might impact existing demand.
💸 Pricing & margins: The details are still TBD.
While Redwood might be a significant growth cycle for Tesla, its launch is still years away. That shouldn’t be a problem for investors with a long time horizon, with a call option on FSD and Optimus as the thesis plays out.
But in the meantime, competitors like BYD are not resting on their laurels.
Stay tuned for more earnings reviews in the coming weeks!
That’s it for today!
Stay healthy and invest on.
We're offering new sponsorship opportunities for B2B and B2C brands to get in front of our audience of investors and business leaders. Click here to learn more.
Get Your Business a Custom Chart
Interested in custom charts for your organization or brand? Complete the form here, and we'll get in touch.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long TSLA in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.